Tomorrow’s World · Focused on the tax avoidance using offshore financial accounts. Also tax payers alleged to avoid tax on Koran source income by pretending to be non0residents

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Tomorrow’s WorldAsia Pacific Real Estate Asia Pacific Real Estate Conference 20136 December 2013

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Taxation in Korea

Taejin Park- Korean Tax Update

Jaedok Lee- Tax Efficient Holding Structure

Ashley Choi- Key Ways to Approach Korean capital

Korean Tax LandscapeKorean Tax Landscape

Taejin Park

PwC Asia Pacific Real Estate Conference 2013 | Singapore 3

AgendaAgenda

Section one Korean Tax Update.

Section two Audit trends

Section three Major issues facing foreign capital


Korean Tax UpdateKorean Tax Update

1. Tax Treaty Update. a eaty Update

• The Fist Income Tax Treaty between Korea and Hong Kong

Agreed to a comprehensive scope of tax information exchange including real estate-Agreed to a comprehensive scope of tax information exchange including real estate

related tax

Dividend withholding tax rate: 10%/15%

• Amended Korea-Luxembourg Income Tax Treaty effective in Sep 2013

D l d h i i h l d h ldi i bli h d d h Deleted the provision that excludes holding companies established under the

special law of Lux from the applicable scope of the treaty

Added that nothing under the Treaty will be construed as restricting the application Added that nothing under the Treaty will be construed as restricting the application

of any provisions of the laws of both countries which are designed to prevent the

avoidance of taxes



1. Tax Treaty Update, cont’d. a eaty Update, co t d

• Protocol to amend Korea-Singapore Income Tax Treaty was effective in June 2013

It permits that if information is requested by a contracting state, the other state It permits that if information is requested by a contracting state, the other state

shall use its information gathering measures to obtain the requested information

and shall not decline to supply information.

• Korea, U.S., U.K., Australia agree on offshore tax information sharing

A d i h h US UK d A li h ff h i f i fi h Agreed with the US, UK and Australia to share offshore tax information fight cross-

border tax evasion.



2. key Ruling Update. ey u g Update

• In the recent court ruling, Cayman LP which was established as an intermediary entity In the recent court ruling, Cayman LP which was established as an intermediary entity

is determined to be classified as a beneficial owner of the Korean sourced income and

should pay corporate income tax in Korea

• The case involves a LP established by a group of investors in Cayman Islands and the

ruling provides that a comprehensive review must be conducted to determine that the

LP i i h i i i h d d i i d d f i LP constitutes a separate entity having its own rights and duties independent from its

investors, in other words that the LP may be a foreign entity for Korean corporate

income tax purpose.income tax purpose.



3. Amendment to the Tax Act for 2013

• The definition of “foreign corporation” would be extended as follows:

• Before

A corporation with its headquarter or main office in a foreign country

• Amended

A corporation with its headquarter or main office in a foreign country with the

following requirements;

i) having a legal personality in Korea,

ii) Only comprised of partners with limited liability,

iii)h i h l l i h d li bili i h di i f i biii)having the legal rights and liabilities that are distinct from its members, or

iv) the same or the most similar kind of domestic entity constitutes a corporation under Korean laws



4. Proposed Amendment to the Tax Act for 2014

• New Compliance procedures for claiming tax exemption under the relevant tax treaties

• Before

Income exemption form withholding under the relevant tax treaties: Submission of

an application for claiming tax exemption under the tax treaty.

T b d d ff ti J • To be amended effective on Jan 2014

A beneficial owner receiving income exempt from withholding under the treaties

through an overseas investment vehicle (“OIV”) is required to submit an application g ( ) q pp

form to the withholding agent

Income exemption from withholding subject to OIV rule



4. Proposed Amendment to the Tax Act for 2014, cont’d

• Tax exemption on dividend shall be abolished in Free Economic Zone

• Before

Withholding tax on dividend income : Exempt

• To be amended effective on Jan 2014

A di t th d ft d t f i i t h i t i t t i According to the draft amendment, foreign investors who invest into certain

designated area (e.g. Free Economic Zone), tax exemption on dividends will be

abolished.

Subject to dividend withholding tax



5. NTS Audit Directive for 2013

Focused on the tax avoidance using offshore financial accounts.Focused on the tax avoidance using offshore financial accounts.

Also tax payers alleged to avoid tax on Koran source income by pretending to be

non0residents.

Added that nothing under the Treaty will be construed as restricting the application

of any provisions of the laws of both countries which are designed to prevent the

id f avoidance of taxes.

On-going inspection on whether the foreign income recipient is a beneficial owner.



6. OIV rule

• OIV conducting the following activities:

Obtaining funds by making offers for investmentObtaining funds by making offers for investment

Acquiring, managing, or disposing of investment assets; and

Distributing profits to its investors.

• Look-through principle

• Example of Beneficial Owners

Qualifying foreign pension fundsQualifying foreign pension funds

Foreign securities depositories with the Korean Securities Depository account

OIV deemed as beneficial owners under tax treaties.

PwC Asia Pacific Real Estate Conference 2013 | Singapore

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12

Korean Tax Update

Documentation required

Korean Tax Update

6. OIV rule, cont’d Documentation required

Tax payer

Documentation Recipient

A ① A li ti f d d t OIV (HK)

A (US)

B (HK)

90%10%Dutch

Investors A ① Application for reduced rate OIV (HK)

B ① Application for reduced rate OIV (HK)

POIV (Dutch)

① Declaration of OIV ② Documentation to support public

OIV (Lux)

90%

OIV (HK)

POIV (Netherlands)

Pension fund (UK)

Investors

(Dutch) ② Documentation to support public OIV status

OIV(HK)

① Declaration of OIV ② Schedule of beneficial owner

OIV

20% 50% 30%

Dividend

Pensionfund

① Application for reduced rate② Documentation to substantiate

deemed beneficial owner status

OIV (Lux) ① Declaration of OIV②

WHT

Luxembourg

100%

② Schedule of beneficial owner③ Declaration received from

POIV(Netherlands) and OIV (HK)

agent

Korean Co


Korean Tax Update

Calculation of average rate

Korean Tax Update

6. OIV rule, cont’d

Country Ownership Reduced tax rate (including resident tax)

WHT

Calculation of average rate A

(US) B

(HK)

10%DutchNetherlands 20% 15% 3%

Hong Kong 50% 12.1%(11%*90/100+22%*10/100)

6.05%

UK 30% 5% 1.5%

90%10%

OIV (HK)

POIV (Netherlands)

Pension fund (UK)

Investors

UK 30% 5% 1.5%

Total 100% 10.55%

OIV

20% 50% 30%

OIVLuxembourg

100% Dividend

Korean Co


Tax Efficient Holding StructuresTax Efficient Holding Structures

Jaedok Lee


AgendaAgenda

Section one LLC Type Real Estate Fund (REF)

Section two Trust Type REF

Section three P-REIT

Section four CR-REIT

Section five PFV


LLC Type REF

Classification LLC Type REF

LLC Type REF

Classification LLC Type REF

Entity Type Limited liability company (“Yuhan hoesa”)

At least 50% of the assets

Investors

Asset QualificationAt least 50% of the assets should be real estate or real estate-related securities

Ownership At least two investors are SupervisionTrust service

Capital investment

Requirement required

Public offer N/A

Instruction by Investor should not be involved

LLC Type REF FSS (*)Trustee

Supervision

Registration

Trust service

Management serviceInvestor in management

Acquisition Tax 30% reduction from regular acquisition tax of 4.6% upon acquisition by December 31 2014

AMC Acquisition

December 31, 2014

Corporate Income tax Avoidable through dividend declared deduction

Capital Gain Tax on Avoidable through dividend

Asset

(*) FSS: Financial Supervisory Service


Capital Gain Tax on transfer of Property

Avoidable through dividend declared deduction

17

Trust Type REF

Classification Trust Type REF

Trust Type REF

Classification Trust Type REF

Entity Type Trust

A t Q lifi tiAt least 50% of the assets h ld b l t t l

Investors

Asset Qualification should be real estate or real estate-related securities

Ownership Requirement

At least two investors are requiredSupervisionTrust service

Capital investment

Requirement required

Public offer N/A

Instruction by I

Investor should not be involved i

Trust Type REF

FSSTrustee

Supervision

Registration

Trust service

Management serviceInvestor in management

Acquisition Tax

30% reduction from regular acquisition tax of 4.6% upon acquisition by December 31, 2014

AcquisitionAMC

3 , 4

Corporate Income tax Not taxable

Capital Gain Tax ontransfer of Property Not taxable

Asset


transfer of Property

18

P REIT

Classification P-REIT

Entity Type Stock corporation (“Chusik hoesa”)

P-REIT

Entity Type Stock corporation ( Chusik hoesa )

Asset Qualification At least 70% of the assets should be real estate

Single shareholder including its

Investors


g grelated parties is not allowed to hold shares in excess of 40% of total issued shares

P bli ff At least 30% of total issued shares SupervisionTrust service

Capital investment

Public offer At least 30% of total issued shares should be offered to the public

Instruction by Investor

Investor can participate in management as a shareholderin accordance with the Articles of In

i

P-REIT MLIT (*)Trustee

Supervision

RegistrationManagement service Investor

corporation.

Acquisition Tax 30% reduction from regular acquisition tax of 4.6% upon acquisition by December 31 2014

AcquisitionAMC

December 31, 2014


Capital Gain Tax ontransfer of Property


Asset

(*) MLIT: Ministry of Land, Infrastructure and Transport


transfer of Property declared deduction

19

CR REIT

Classification CR-REIT

Stock corporation

CR-REIT

Entity Type Stock corporation (“Chusik hoesa”)At least 70% of the assets should be real estate. Seller should repay at least 50% of existing debt with the sales proceeds under

Investor

Asset Qualificationthe sales proceeds under corporate restructuring plan. Approval is necessary from Financial Supervisory Service regarding corporate restructuring plan• MLIT

SupervisionTrust service

Capital investment

p


N/A

Public offer N/A

CR-REIT

• MLIT

Trustee

• FSSApprovalManagement service

Instruction by InvestorInvestor can participate in management as a shareholder in accordance with the Articles of Incorporation.

30% reduction from regular

AMC Acquisition

Acquisition Tax 30% reduction from regular acquisition tax of 4.6% upon acquisition by December 31, 2014


Asset


declared deduction



20

PFV

Classification PFV

PFV

Classification PFV

Entity Type Stock corporation (“Chusik hoesa”)

Asset Qualification Facility and SOC investments,

Investor

Asset Qualification natural resource development


Financial institution should be a shareholder of a PFV holding at least 5% of capital

• Capital investment (5%)• Cash management

Capital investment

5 p

Public offer N/A

Instruction by InvestorInvestor can participate in management as a shareholder in

d ith th A ti l f

PFV Tax Office

Financial Institution

Report

• Cash management

Management service Instruction by Investor accordance with the Articles of Incorporation.

Acquisition Tax 50% reduction from regular acquisition tax of 4.6% upon

i iti b D b 31 201

AMC Acquisition

acquisition by December 31, 2014


Capital Gain Ta on A oidable thro gh di idend

Asset

* MLIT: Ministry of Land, Infrastructure and Transport




21

Key Ways to Approach to Korean Key Ways to Approach to Korean Capital

Ashley Choi


AgendaAgenda

Section one Major players and their needs

Section two Key ways to approach to Korean capital


1 Major players and their needs1. Major players and their needs

Investor type SWF Pension funds / Institutional investors

I di t i t t Direct investment Indirect investment through “Trust”Preferred structure

Direct investment(Special tax benefit)(e.g. Section 892)

Investors’ needs for their investments Low risk, stabilized cash flow, and the focused location for investmentstheir investments


1 1 Direct investment structure1.1 Direct investment structure

Tax Implications

Special ta benefit (e g section 892)• Special tax benefit (e.g. section 892)

Major issue

SWF, etc

KoreaInvestment

• Whether qualification can be satisfied

Korea

Overseas

Fund

Overseas


Investment Asset

1 2 Indirect investment structure1.2 Indirect investment structure

Tax Implications

• Not taxable entity

KoreanInvestors

y

• Foreign tax refund

TAsset

Manager

Trustee

FinancialSupervisory

Trust Service

Registration

Investment

Major issue

• How the trust is treated from overseas

TrustManager ServiceManagementService KoreaInvestment

How the trust is treated from overseas jurisdiction

- Transparent vs. Non-transparent

Overseas

Fund

Overseas


Investment Asset

2 Key Ways to approach to Korean Capital2. Key Ways to approach to Korean Capital

Relation oriented

atmosphereatmosphere

Understanding of

Korean marketWell informed of precedent investment structures Effective

communicationcommunication


Documents

Tomorrow’s World · Focused on the tax avoidance using offshore financial accounts. Also tax payers alleged to avoid tax on Koran source income by pretending to be non0residents